Pundits and Quacks: Financial Experts and Market Feedback

Rudiger, Jesper and Vigier, Adrien (2014): Pundits and Quacks: Financial Experts and Market Feedback.

Abstract

By choosing whether or not to follow a financial expert's advice, a privately informed trader implicitly screens the ability of this expert. We explore the performance of the resulting feedback mechanism. In the medium run, feedback may altogether break down, enabling experts of low ability to maintain a lasting reputation and affect prices durably. Yet in the long run, the market almost always learns experts' true type. While prices get stuck in the medium run, they thus converge in the long run to the asset's correct valuation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Informational Cascades; Experts; Reputation; Asset Price Bubbles
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G2 - Financial Institutions and Services > G20 - General

References

Abreu, D., Brunnermeier, M. K., 2003. Bubbles and Crashes. Econometrica 71 (1), 173–204.

Admati, A. R., Pfleiderer, P., 1986. A Monopolistic Market for Information. Journal of Economic Theory 39 (2), 400–438.

Allen, F., Gale, D., 1992. Stock-price Manipulation. Review of Financial Studies 5 (3), 503–529.

Allen, F., Gorton, G., 1993. Churning Bubbles. Review of Economic Studies 60 (4), 813–836.

Avery, C., Zemsky, P., 1998. Multidimensional Uncertainty and Herd Behavior in Financial Markets. American Economic Review 88 (4), 724–748.

Barlevy, G., Veronesi, P., 2003. Rational Panics and Stock Market Crashes. Journal of Economic Theory 110 (2), 234–263.

Benabou, R., Laroque, G., 1992. Using Privileged Information to Manipulate Markets: Insiders, Gurus, and Credibility. Quarterly Journal of Economics 107 (3), 921–958.

Cuoco, D., Kaniel, R., 2011. Equilibrium Prices in the Presence of Delegated Portfolio Management. Journal of Financial Economics 101 (2), 264–296.

Dasgupta, A., Prat, A., 2006. Financial Equilibrium with Career Concerns. Theoretical Economics 1 (1), 67–93.

Dasgupta, A., Prat, A., 2008. Information Aggregation in Financial Markets with Career Concerns. Journal of Economic Theory 143 (1), 83–113.

Dasgupta, A., Prat, A., Verardo, M., 2011. The Price Impact of Institutional Herding. Review of Financial Studies 24 (3), 892–925.

DeLong, J., Shleifer, A., Summers, L. H., Waldmann, R. J., 1990. Positive Feedback Investment Strategies and Destabilizing Rational Speculation. Journal of Finance 45 (2), 379–395.

Gennotte, G., Leland, H., 1990. Market Liquidity, Hedging, and Crashes. American Economic Review 80 (5), pp. 999–1021.

Glosten, L. R., Milgrom, P. R., 1985. Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders. Journal of Financial Economics 14 (1), 71–100.

Grossman, S., 1976. On the Efficiency of Competitive Stock Markets Where Trades Have Diverse Information. Journal of Finance 31 (2), 573–585.

Grossman, S. J., Stiglitz, J. E., 1980. On the Impossibility of Informationally Efficient Markets. American Economic Review 70 (3), 393–408.

Guerrieri, V., Kondor, P., 2012. Fund Managers, Career Concerns, and Asset Price Volatility. American Economic Review 102 (5), 1986–2017.

Jacklin, C. J., Kleidon, A. W., Pfeiderer, P., 1992. Underestimation of Portfolio Insurance and the Crash of October 1987. Review of Financial Studies 5 (1), 35–63.

Kaniel, R., Kondor, P., 2013. The Delegated Lucas Tree. Review of Financial Studies 26 (4), 929–984.

Kyle, A. S., 1985. Continuous Auctions and Insider Trading. Econometrica 53 (6), 1315–1335.

Lee, I. H., 1998. Market Crashes and Informational Avalanches. Review of Economic Studies 65 (4), 741–759.

Ottaviani, M., Sørensen, P. N., 2006a. Professional Advice. Journal of Economic Theory 126 (1), 120–142.

Ottaviani, M., Sørensen, P. N., 2006b. Reputational Cheap Talk. Rand Journal of Economics 37 (1), 155–175.

Ottaviani, M., Sørensen, P. N., 2006c. The Strategy of Professional Forecasting. Journal of Financial Economics 81 (2), 441–466.

Park, A., Sabourian, H., 2011. Herding and Contrarian Behavior in Financial Markets. Econometrica 79 (4), 973–1026.

Scharfstein, D. S., Stein, J. C., 1990. Herd Behavior and Investment. American Economic Review 80 (3), 465–79.

Shleifer, A., Vishny, R. W., 1997. The Limits of Arbitrage. Journal of Finance 52 (1), 35–55. 38

Tirole, J., 1982. On the Possibility of Speculation under Rational Expectations. Econometrica 50 (5), 1163–1181.

Trueman, B., 1994. Analyst Forecasts and Herding Behavior. Review of Financial Studies 7 (1), 97–124.

Zeira, J., 1999. Informational Overshooting, Booms, and Crashes. Journal of Monetary Economics 43 (1), 237–257.

Zwiebel, J., 1998. Corporate Conservatism and Relative Compensation. Journal of Political Economy 103 (1), 1–25.